Fluid Dynamics: Washington Wine & Spirits Update

“Washington Wine Sales in a ‘State of Flux’” — that’s that title of a recent article by Peter Mitham on the Wines & Vines website and I think Peter is right on the money. It’s a little like Bob Dylan’s “Ballad of a Thin Man:” You know something’s happening, but you don’t know what it is.

At least some Washington State voters are feeling that way. They voted to privatize spirit sales last year, assuming that increased competition would drive prices down.

Never assume, they tell you in school, and that would have been good advice in this case, since the combination of higher taxes and fees plus distributor mark-ups have pushed the price of spirits higher on average (for now at least) than under the state store system. Click on the link to Peter’s story to see exactly how this came about (and how it could “maybe” change in 2013).

Wine Does the Wave

It has been interesting to watch as waves of reaction and response have swept over the wine market. The first wave was all about geography — would the addition of spirits to retail store shelves reduce wine’s territory? The overall answer is probably yes, but different retailers adopted different strategies. Some held the line on wine and carved out new space for spirits. Others made room for spirit SKUs by cannibalizing the wine wall. And new entrants such as BevMo added space for both.

The ready availability of spirits was a novelty at first and I think some wine sales were replaced by spirit sales on that basis initially. The fact that spirit prices are higher than before means of course that wine is now relatively cheaper in Washington — and that should have increased wine sales to the extent that the two categories are substitutes, but I’m not sure that this has actually happened. No one has come up to me and gushed that wine is now a great bargain compared to vodka. So much for relative prices? Not so fast …

It’s All Relative (Prices, that is)

It’s been about three months since privatization and the price and geography factors are starting to stabilize, but the commodity composition of the wine wall is still quite fluid. We are seeing shifts in what types of wines and in what quantities are offered for sale.

One of the changes from the old regime is that distributors are able to offer case discounts or assess broken case premiums, which amount to the same thing. Essentially this means that the wholesale cost can in some cases depend on the volume that is purchased. This is business as usual in most parts of the retail world and in most parts of the U.S. wine market, but it’s a big change for us here in Washington.  The bottle cost was the same whether you bought one or a dozen under the prior regime.

So now the relative price of slow moving wine has increased relative to fast-selling stuff and this seems to be having an effect on the commodity composition of the wine wall.  Even where the total area allocated to wine has remained the same I am sensing somewhat fewer choices as the space allocated to higher volume products is increased and the low volume space shrinks accordingly. It’s as if someone imposed a tax on low volume wine.

If a winery offers six wines at similar cost and price points, but one sells much more quickly than the others and therefore justifies a discounted case purchase, well you can see the incentive to streamline purchasing. As Peter’s article suggests, this effect can be powerful in theory but it is very uneven in practice since not all distributors (or self-distributing local producers) offer volume discounts or charge extra for smaller lots.

So the wine selection hasn’t changed much at all at some wine shops, like Pike & Western, the excellent Seattle store profiled in the Wines & Vines article. But the transformation has been quite dramatic in other places and, of course, the big box stores change the game in others ways.

It is my sense (unconfirmed by hard data at this point) that the availability of small producer wines is at least somewhat diminished, but not uniformly so and that some retailers (such as Wine World & Spirits in Seattle) have stepped in to fill the gap by offering a larger selection of boutique wines. I was encouraging small producers to focus on direct sales (rather than relying on retail channels)  before the recent changes and I think this is still good advice.

Some Gotta Win[e], Some Gotta Lose?

So what’s the bottom line? Well, I’ve actually avoided writing about this topic for several months (despite reader pressure) because I wasn’t sure. And I’m still not. It seems to me that the shoes are still dropping and the evolution of the market is not finished.

I’ve written in the past that wine markets bear  certain superficial similarities to financial markets. One of these is the tendency to boom and bust and another is that price and quantity often “overshoot” in response to exogenous shocks. Both make it difficult to predict what will happen next.

Will the reforms ultimately be beneficial for wine in general and Washington wineries in particular?  Probably, but I’m reminded of the late Chinese Communist leader Zhou Enlai’s reply when asked about the historical significant of the 1789 French Revolution. Too soon to tell, he said. In the case of wine, we’ve got to wait for things to settle down and for good data to be available.

Even then it will be difficult to pick apart the positive and negative effects that can be attributed to the privatization policies and regulatory reforms because of everything else that is going on. The wine market is in a rising trend generally and wine sales would have increased even without any change in the laws.

At the same time, the margin pressures that I wrote about in the Tight, Fat and Uncorked series would have put pressure on retailers and distributors to streamline their product lines even if the laws were unchanged.  It will be tricky to separate these and other factors from the retail regulatory change effect.

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11 responses

  1. Mike, I agree it is way too soon to make any real assessments. I am told by some distributors that choices are shrinking, and most of the supermarkets I have visited seem to have returned to the bad old days of stocking just the most cheap and cheerful plonk. But what should happen, along with the vast selections offered by BevMo, Total Wine, etc., is that niche retailers (and distributors) will see a market opportunity. This will play out especially with spirits, such as amaros, where there is certainly some demand and little or no current supply. As for wines, let’s not forget that Washington consumers can purchase virtually any wine they want from the West Coast online.

  2. The “broken case premium” is really hurting small stores. One large distributor is charging only 40¢ per bottle extra, but the largest distributor is charging $2.50 per bottle extra unless you order THREE cases of a given wine. So at this point, I have no more Columbia Crest, Ste. Michelle, or Hogue in my store. I’m ordering more from some smaller distributors who are not charging extra, but much of what they have is too pricey for this neighborhood.

      • It amounts to the same thing, but I’d be willing to bet that the $2.50 isn’t a really “broken case charge”, but instead a $30.00/case discount on 3+ cases that he’s not taking advantage of.

      • (Responding to Richard below) – Nope. Example, the wholesale cost for Columbia Crest Grand Estates used to be $7.19 per bottle, for any quantity. Now, if purchasing less than 3 cases, it’s $9.69 per bottle. If you buy 10 cases, it gets down to around $6.00 per bottle, which is why Total Wine can retail it for $7.27.

      • Dave – In the rest of the country those are called quantity discounts. In the example you cite, the front line price of the Columbia Crest Grand Estates is $116.28 per case (9.69/bottle), and then there’s a $30/case discount on a 3 case purchase and a $45/case discount on a 10 case purchase. That’s pretty standard stuff for most big brands. Good for the big box stores, terrible for small independent retailers.

  3. Hey Mike, I thought you didn’t cover state issues? How about an analysis of whether the availability of 30 day credit terms would help or hurt WA wineries and WA wine consumers? That’s the next big issue here and we need an economist to explain the pros and cons.

    Paul

    http://wilridgewinery.com/signatures/wilridge-signature.jpg

    Paul Beveridge – Winemaker, Tapenade, Inc. dba Wilridge Winery 1416 34th Avenue, Seattle, WA 98122 | paul@wilridgewinery.com Winery: 206-325-3051 | Vineyard: 509-966-0686 | Facsimile: 206-322-1110 | Mobile: 206-850-2098

  4. A Washington winemaker writes …
    “Nice article, Mike. The only thing I would add is that after the stores were allowed to add liquor (actually before they were actually “allowed” in many circumstances) they slowed way down on the wine buying in order to free up money for spirits. Stores like Pete’s that don’t carry spirits didn’t change, but for two or three months we were hurt quite a bit by slowdown in buying and placements. That seems to have picked back up but I’m not sure if it will catch back up on the couple of months of down sales. Hard to say as the volumes change year-to-year anyway..”

  5. I own The Wine Shop in Smokey Point, WA and I used to spend a lot of money with each of the two big distributors who are now charging me more per bottle than before ($1-$3)…well unless I buy 10 cases …so now I only buy from the smaller distributors who want my business….funny how that works out. PS: There is a Costco in my shopping center and I will celebrate 4 years in October.

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